For instance if the amount of proceeds available after all upfront costs from refinancing is less than the current reverse mortgage provides and the interest rate is not substantially lower, that is a no brainer – don’t do it. Just because a refinance will yield $100,000 more in available proceeds than the current reverse mortgage provides is no reason to obtain a refinance especially if the current reverse mortgage was obtained simply to provide a line of credit which has yet to be significantly tapped. If the note interest rate would rise substantially as a result, refinancing should be cautiously considered.

An interesting example arose a few years ago. Two neighbors had obtained reverse mortgages about a month apart. They were about the same age, lived in the same development with identical floor plans, and had made similar improvements. Their appraisals were all but identical. Four months later, the lending limit in their area rose about $50,000. The rise in the value of their homes made them eligible for a higher principal limit of about $30,000 (and net of upfront costs, $20,000).

It was clear one neighbor really needed it due to her desperate financial situation. Everyone from the counselor to FHA agreed that she should get it. We all agreed she should do it, even if the interest rate on the note went up. She deperately needed to get rid of her other debts.

The second neighbor obtained his existing reverse mortgage to provide funding just in case his grandchildren needed it for college. He had a good pension, a great medical plan in retirement, and Social Security. His lifestyle and costs were modest and he had no need for additional cash beyond his income. He saved monthly and had significant cash in reserve with a modest investment portfolio. Other than upfront costs, he had not used one dime of the proceeds. Although he wanted to refinance, there was no way any of us wanted to pursue it; it simply seemed like a waste of approximately $10,000. The note interest rate would remain the same (there was no fixed rate HECM at that time). He finally relented and decided not to move forward.

While there are some bright rules to follow, refinancing criteria should also have room for subjective decision making.